Integrated energy firm Marathon Oil Corporation (MRO) announced plans to separate its refining and sales business from its exploration and production operations, thereby creating two independent companies. Marathon had planned such a move when crude oil prices peaked more than two years ago but backed off later, when the financial crisis hit commodity markets.
The spin-off, which could take effect on June 30, 2011 subject to certain precedent conditions, will see the formation of a new downstream company called Marathon Petroleum Corp, expected to be the fifth largest domestic refiner. It will include Marathon’s six refineries having a combined capacity of 1.1 million barrels a day and also deal with marketing and pipeline transportation.
The remaining business will continue as an upstream venture under the ‘Marathon Oil Corp.’ name and comprise the company’s exploration and production unit and its Canadian oil sands operations.
The spin-off is proposed to be tax-free to shareholders of Marathon. Post separation, current stockholders of Marathon will get one share of Marathon Petroleum for every two shares held. Marathon Oil will remain in Houston, Texas, while the new company – to trade on the New York Stock Exchange under the symbol ‘MPC’ beginning July 1 – is likely to be headquartered in Findlay, Ohio.
Marathon’s move to split itself into two is seen as an attempt to focus on its core, profitable business of finding and producing energy. Marathon also reasoned that it has become difficult to carry out together two different kind of businesses, considering the lack of physical integration between the two. Just about 5% of the crude churned out by the company was being utilized by its refineries, Marathon pointed out. The timing of the spin-off also makes sense, as it had almost winded up a major capital expenditure program that was running $7 – $8 billion annually.
We remain positive on the outlook for new Marathon post-split, as it holds the promise of unlocking significant value. Creation of two separate companies will allow both of them to pursue great opportunities in their respective market segments without the constraints of the parent company and better serve the needs of both investor groups.
Following the Marathon spin-off announcement, shares of the company were up approximately 6% in New York Stock Exchange trading on Thursday.
Marathon, the fourth largest U.S.-based integrated oil company, and behind ExxonMobil (XOM), Chevron Corp. (CVX) , and ConocoPhillips (COP), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on the stock.
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